When the interest rate of a loan varies during the term, the loan program is called as Adjustable Rate Mortgages or ARM’s. This type of loan will usually have a fixed interest for a certain period of time – usually 3, 5, 7 or 10 years – and then afterwards adjust on a yearly basis. Initially, the interest rate on an ARM is going to be lower compare to the 30 year fixed mortgage. This can be advantageous if you plan on being in you home with a timeline of one to 10 years.

Advantages of an Adjustable Rate Mortgage

Lower interest rates can save you hundreds of dollars in payments every month. It may be even better compared to the usual 30-year fixed rate mortgage. The adjustable rate mortgage allows you not to pay the fix rate for a full 30-years like the 30-year fixed mortgage. With the adjustable rate mortgage, the fixed rate will only be paid only for the years you need, no more no less.

In the adjustable rate mortgages plan, you’ll have the ability to make interest only payments. Having only to pay interest, your monthly payments will significantly be lowered.

Adjustable Rate Mortgage Amortization

Adjustable rate mortgages are usually repaid over a 30-year period. The initial rate is fixed from one month to ten years. All adjustable rate mortgages have a “margin” plus an “index”, which makes up the “fully indexed” rate. The result of this is the end rate. The end rate is may be expressed at 6.25%, or whatever is the rate when your initial fixed period of one to ten years ended. Take note that you will be the one to choose the length of your initial fixed period. The length of the period will be depends on the duration when you’ll need it. Because of this, you will be able to get a lower rate.

Depending on the index and the total financed in relation to the property value, the margin on loans may range from 1.5% to 4.5%. Property value is the “Loan to Value” of the house. On the other hand, the index is the financial tool, where the adjustable rate mortgage is attached to such as, one-year Treasury Security, London Interbank Offered Rate (LIBOR), Prime, six-month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).